An important business segment for foreign banks in India, particularly from a transfer pricing perspective, is their offshore loan book. Foreign banks operating through branches in India typically offer foreign currency lending options to their corporate customers in India. Considering that such loans are in foreign currency, Indian branches of foreign banks tend to approach their overseas co-branches/affiliates to book and fund loans to borrowers in India. While the actual fact patterns may vary across banks, the role of the Indian branch is generally focused around liaising with potential borrowers locally and maintaining relationships, while the overseas co-branches/subsidiaries perform the booking, lending and risk assuming role. Accordingly, such lending transactions become relevant to Indian branches of foreign banks since they need to be compensated under Indian transfer pricing regulations on an arm's length basis for the role they perform in completing such lending transactions by their group branches/affiliates abroad. Banks have, over the years, applied varying transfer pricing policies, and the subject has attracted a fair amount of litigation with tax authorities.

In a recent, first-of-its-kind ruling, in the case of Credit Lyonnais India branch, the Income Tax Appellate Tribunal in Mumbai held that the role played by the Indian bank branch in relation to credit analysis of Indian borrowers is core to the overseas co-branch for taking decisions on granting loans to the Indian borrowers. Accordingly, an attribution was considered necessary and the tribunal attributed 20% of the fee received by the overseas co-branch from the borrower, to the Indian branch for the credit analysis function. Since the Indian branch did not contribute to the loan amount, the tribunal did not attribute any interest income to it. During the course of the proceedings, the tax payer, relying on the India-France tax treaty, had argued that no profit should be attributed to it on account of its mere facilitation role that helped signing of the loan agreement. However, the tribunal held that the credit analysis carried out by the Indian bank branch of the bank was core to taking decisions on granting the loan, and a part of the fee income earned by the overseas co-branch should be attributed to the Indian branch. Having said this, the tribunal did not discuss the relative importance of other functions involved in the lending transactions, and the impact of such functions on the attribution of profits. The tribunal also did not provide any guidance